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Europe’s New Tax on Greenhouse Gases

Europe’s New Tax on Greenhouse Gases

In a first, the European Union is imposing a charge on some high-emissions imports like steel. Here’s what it means.

The European Union has approved the world’s first carbon tax on imports. It’s designed to make certain products a lot more expensive if they come from manufacturers that aren’t paying for their greenhouse gas emissions.

It didn’t get a lot of attention, but it’s a big deal because these kinds of tariffs could be very effective in reducing the industrial carbon dioxide emissions that are heating the planet to dangerous levels. It’s a potentially powerful incentive for countries to curb emissions. But it’s also a risky move in some ways because it could disrupt global trade and have an outsize effect on poorer countries.

Here are a few key things to know.

First, what is a carbon border tax?

The stated goal of these tariffs is to level the playing field. Imagine that European steel manufacturers are paying a fee for their carbon dioxide emissions and their competitors outside the E.U. aren’t.

That would put the European countries at a disadvantage on price. It could, in theory, also push European companies to relocate their operations to countries where carbon isn’t taxed. That’s what specialists call “carbon leakage,” the idea that emissions can just move elsewhere when restrictions are imposed.

To avoid that, Europe is going to apply the carbon border tax, formally known as a carbon border adjustment mechanism, on foreign competitors that aren’t paying as much, or anything at all, for their emissions.

The new tax will be imposed on seven high-emissions sectors, including steel and cement, starting in 2026.

The European law, which was formally approved last week, has reignited conversations about carbon border taxes in other countries. Senator Sheldon Whitehouse, a Rhode Island Democrat, told me in an email that he plans to present a new proposal for a similar tax in the United States in the coming months.

“I’m optimistic there’s a pathway to getting a bipartisan carbon border adjustment through the Senate,” Whitehouse wrote. “We can deliver a boost to cleaner American manufacturers that are competing against high-polluting counterparts in China, India and elsewhere.”

What it could mean for developing countries

Imposing taxes on emissions could cost jobs in the developing world, where the expensive proposition of decarbonizing economies is especially complicated.

Let’s take India, a country that relies heavily on coal for energy, as an example. According to calculations from a 2022 study from Boston University, Indian steel could get taxed at 15 percent under the new European rules, which could cause Indian steel exports to Europe to fall by 58 percent. That could be a big problem for India, where the steel industry indirectly employs about two million people.

Is it fair?

Major emerging economies, like Brazil and India, as well as smaller ones, such as Thailand and Cameroon, were not happy about the European move.

Some countries say it’s a thinly disguised way for the Europeans to protect their companies from international competition under the guise of climate policy. (Sound familiar? That’s exactly the kind of criticism the U.S. Inflation Reduction Act is facing from some foreign countries.)

Perhaps more important, critics of the new European tax say the countries that have contributed the least to climate change shouldn’t have to pay as much as the industrialized countries that caused the problem.

They point to a principle enshrined in the 2015 Paris accord and other environmental agreements. It says that, while the overall responsibility to stop environmental destruction and climate change is common to all countries, each has different levels of responsibility according to its own circumstances.

It’s a principle that hasn’t had much impact when it comes to international trade. Varun Agarwal, an expert in climate policy at the World Resources Institute in India, told me he believed it would be unlikely for the law to fall under a challenge in the World Trade Organization.

“At the moment, there is no principle of equity enshrined within trade policy,” he said.

Still, the success of Europe’s carbon border tax may depend on how these disagreements play out, according to Rishikesh Ram Bhandary, a climate finance expert at Boston University’s Global Development Policy Center.

The policy may help appease opponents of climate action in certain countries, he said, by assuring critics that the competitiveness of local companies won’t be harmed. But by fueling mistrust between countries when it comes to climate policy, he added, it could also “unwittingly have the exact opposite impact of simply increasing polarization.”

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Claire O’Neill, Chris Plourde and Douglas Alteen contributed to Climate Forward. Read past editions of the newsletter here.

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